EnWave Corporation ($ENW)

Good morning. Welcome to EnWave Corporation's Second Quarter 2026 Earnings Conference Call. My name is Christine, and I'll be your operator for today's call. Joining us for today's presentation are the company's President and CEO, Brent Charleton; and Dylan Murray, EnWave's CFO. As a reminder, the conference is being recorded. [Operator Instructions] Finally, I would like to remind everyone that this call will be made available for replay via a link in the Investor Relations section of the company's website at www.enwave.net. Now I would like to turn the call over to EnWave's CEO, Mr. Brent Charleton.

Thanks very much, and thanks to everyone who has joined us today for EnWave Q2 Fiscal 2026 Quarterly Conference Call. The information, as per usual, we will present today contains forward-looking information that is based on our management's expectations, estimates and projections. Our statements are not a guarantee of future performance and involve a number of risks, uncertainties and assumptions. Please consider the risk factors in the filings made by EnWave on SEDAR when reviewing this information. Also, all amounts discussed will be in Canadian dollars unless otherwise noted. Now while this quarter's financial performance was well below our expectations, I want to begin by emphasizing something very important. The fundamentals of EnWave's business model remains strong, differentiated and highly scalable. We are disappointed with our Q2 quarterly results. The revenue timing delays, slower-than-expected large-scale equipment conversion activity and extended commercialization time lines with certain partners impacted near-term performance. However, we believe that these are timing-related issues rather than structural challenges with our technology, our customer relationships or our long-term strategy. What remains unchanged is the growing global demand for premium food preservation technologies, reduced waste solutions and more efficient manufacturing systems. These are all areas where EnWave continues to hold a unique competitive advantage. Although we've yet to announce a material machine sale transaction this year, we have built two large-scale REV machines that are ready to deploy quickly when purchased, and our current sales opportunity pipeline includes several large-scale REV machine prospects. Our strategy has always been centered on building recurring high-margin royalty streams from commercialized REV technology deployments. That strategy takes time to mature, but once successful partners scale, the operating leverage can become very meaningful. Historically, our business has been lumpy, and this fiscal year has proven to be no different. Stating the obvious, we are working hard to confirm our next machine sales. Year-to-date, we have sold four 10-kilowatt units and have signed four new commercial licenses. And most recently, a technology evaluation and license option agreement with a leading global consumer packaged food company this morning. Our expectation is that we will confirm additional commercial agreements in the coming months. In regards to our toll manufacturing business, REVworx, as we call it, we have experienced a lull in contracts as a few larger customers have now been passed on to other existing royalty partners of EnWave for larger order volume. That ultimately benefits us through higher manufacturing capacity utilization from those royalty partners and frees up our facility to engage new projects. Currently, we are planning for two material projects to start at REVworx later this summer. One is with a major European food manufacturer that generates more than $1 billion in revenue per year currently and is focused on the commercialization of several new, healthier toddler snack items. The second potential project is with a leading tofu company focused on value-add new applications for consumers to enjoy the health benefits from eating tofu. Importantly, we continue to see encouraging momentum from several existing royalty partners who are demonstrating real commercial success in the marketplace. One of the clearest examples is the continued performance of BranchOut Foods, who are achieving strong retail penetration with products manufactured using REV technology. Their ability to deliver premium texture clean label snacks and differentiated consumer experiences validates the value proposition of our platform. BranchOut recently launched a fruit snack mix into the second largest warehouse club retailer nationally, and they continue to win rotations in the largest warehouse club retailer ecosystem. BranchOut Foods achieved record production in March 2026 with 46,000 kilograms of product being produced per month, the highest in its history. They have publicly stated that the company is positioned to produce its best ever financial performance in our Q3. Additionally, long-standing royalty partner, Milne MicroDried continues to win new material customer accounts as they continue to grow their sales of REV dried fruit, vegetable and dairy ingredients. They have entrenched themselves into many of the largest consumer packaged goods companies globally. We are also seeing increasing interest from international markets where food security, energy efficiency and shelf life extension are becoming more strategic priorities. Our recently announced commercial license signed with the Dry Hub in Egypt reflects these trends. Several other prospective partners are progressing through evaluation and pilot phases. And while sales cycles remain longer in the current macroeconomic environment, engagement levels remain active and constructive. What gives us confidence today is that the industry trends supporting our business are actually becoming stronger. Consumers continue to demand healthier, minimally processed foods. Food manufacturers are under pressure to reduce energy consumption and waste supply chain resilience and ingredient stability are becoming increasingly important and premium snack and ingredient categories continue to grow globally. REV technology directly addresses these needs. As we move through the balance of the year, management is focused on four key priorities. First, expanding our royalty revenue. Our highest strategic priority remains increasing the recurring royalty income from existing commercial partners. Several royalty-generating customers continue to expand production capacity and distribution reach. As these businesses scale, EnWave benefits from operating leverage without requiring proportional increases in overhead. This is the long-term value creation engine of the company. Second, improving the commercial conversion of our large-scale opportunities. We are refining our business development approach to focus on sectors where commercialization time lines are shorter and customer return on investment is more immediate. These sectors include healthy fruit snacks, pet treats and dairy applications, which are proven winners in the market. The market environment over the last year has been more cautious, particularly regarding capital equipment spending. However, we believe that discipline in creating opportunities for stronger, better capitalized partnerships moving forward. Third, cost discipline and capital efficiency. We remain committed to prudent financial management, and our team has and will continue to take measured actions to align operating expenses with current market conditions while preserving our core intellectual property, technical expertise and commercialization capabilities. Currently, we believe EnWave has adequate liquidity to continue executing on our strategic objectives. And finally, fourth, our continuing need to drive innovation. Innovation remains central to our competitive position. And our technical teams continue to work closely with partners to optimize product quality, throughput efficiency and new application development. We continue to believe REV technology has substantial untapped potential across ingredients, nutraceuticals, pet food and specialty agricultural applications. Now with our four key priorities summarized for this year, I want to address something directly. Periods like this can understandably create frustration among shareholders, and we recognize that. But we also believe it is important to maintain perspective. EnWave has spent years building a significant intellectual property portfolio, establishing commercial credibility and creating a royalty-based business platform that is difficult to replicate. We are not managing the business for a single quarter. We are building a technology platform designed to generate long-term recurring value through global commercialization partnerships. And importantly, we are seeing evidence that this model works. Our successful royalty partners continue to validate both the technology and the economic model. As those relationships mature and additional partners enter commercial production, we believe the financial profile of the company can improve materially over time. The near-term environment remains challenging, but our conviction in the long-term opportunity remains high. And with my summarized update complete, I'll now ask Dylan to summarize EnWave's detailed quarterly financial performance.

Thanks, Brent. Good morning, everyone, and thank you for joining us today. Please note that the figures I'll be discussing can be found in our press release from yesterday and in the financial statements and MD&A filed on SEDAR, and all amounts are in Canadian dollars unless otherwise noted. I will make reference to adjusted EBITDA, which is a non-IFRS financial measure, so please refer to the non-IFRS financial measure disclosures and reconciliation to GAAP net income, both in the press release and in our MD&A. And also please note that the comparative period I'll refer to throughout this presentation is the prior Q2 ended March 31, 2025. Revenues for Q2 were $1.2 million compared to $3.7 million in Q2 2025. And a decrease of about $2.5 million or 69%, and the decrease was primarily related to fewer machine sales and machines and fabrication due to the inherent volatility in large-scale machine orders. Base royalty revenue was $434,000 in Q2 2026 compared to $474,000 in the comparative period, a decrease of $40,000 or 8%. Total royalty revenue for Q2 2026, including exclusivity payments, was $465,000 compared to $474,000 in the comparative period, a decrease of $9,000 or 2%. And the decrease in royalty revenue was partially attributable to the timing of revenue recognition by our partners as royalties can be based on a percentage of partner-generated revenue. The company expects royalty revenue growth in future periods as a few partners notably BranchOut Foods that Brent mentioned earlier, have communicated inventory builds in anticipation of increased commercial sales activity and expanded product distribution in upcoming quarters. Additionally, as our royalty partners grow their businesses and increase capacity utilization of installed REV equipment, further REV installations will follow from new sales contracts and material royalty growth should continue in the coming quarters. Gross margin for the company in Q2 2026 was 35% compared to 33% in the comparative period, with the increase primarily attributable to lower fabrication costs from large-scale machines on contract as compared to the prior quarter. SG&A expenses, including R&D, were $1.5 million for Q2 2026 compared to $1.4 million for the comparative period, an increase of about $100,000 or 6% with the increase primarily related to more sales personnel and the timing of patent maintenance fees and professional fees. Adjusted EBITDA is a non-IFRS financial measure, so please refer to our MD&A for the reconciliation from GAAP net income to adjusted EBITDA. The company reported an adjusted EBITDA loss of $775,000 for Q2 2026 compared to adjusted EBITDA of $112,000 for Q2 2025. A decrease of $887,000 over the comparative period. The decrease was primarily related to fewer machine sales and machines in fabrication due to the inherent volatility in large-scale machine orders. And we finished Q2 2026 with cash and cash equivalents of $3.3 million and a net working capital surplus of $7.9 million as at March 31. EnWave has a credit facility with Desjardins for growth and working capital purposes. And at March 31, 2026, the credit facility had a total authorized limit of about $2.5 million at a rate of prime plus 1.5%. And with $1.2 million drawn to date and about $1.3 million in remaining undrawn availability. As of March 31, inventory was $3.9 million compared to $1.4 million at year-end, an increase of $2.5 million or 179%. The increase in inventory is a result of the company manufacturing two large-scale machines, specifically 100-kilowatt nutraREV and 120-kilowatt quantaREV machine. And both machines in aggregate were approximately 75% complete by March 31, and will be ready for commissioning in Q3. These investments, combined with an expanded marketing presence through increased trade show attendance and sales personnel is designed to ensure faster order fulfillment and support prospective future machine sales.

Thanks, Dylan. I'd now like to open the call for your questions. Operator, please provide the appropriate instructions.

[Operator Instructions] Our first question comes from the line of Noel Atkinson with Clarus Securities.

I want to start with the license option agreement that you announced this morning. Congratulations on that. Is this the largest company by revenue that you've ever signed one of these agreements with?

Very close to you in regards to how large this business is and how diversified the opportunity is with different sectors within the business that we'll be evaluating the technology simultaneously once we deliver this 10-kilowatt machine.

Okay. So you start off -- so this is similar to other license option agreements that you've signed before where they rent or lease a 10-kilowatt they test it out and then you have the -- you hope to kind of progress towards sale of large-scale equipment to them or their co-manufacturers?

Yes. I would say the marquee difference here, Noel, is the series of events that occurred prior to signing this TELOA. So we had actually hosted their R&D group specifically for a product application that they're hoping to commercialize in the next year or so. And we did the product development. We connected them with a current license partner who will likely be doing the co-manufacturing for material volumes for commercialization of this product. And so they already have a path towards one area of commercialization using REV technology, but not necessarily through their own acquisition of machinery. That is fine, as we've stated before in times past, when we connect these large CPG companies with current co-manufacturers within our ecosystem, it drives capacity utilization, which should lead to additional machine purchase orders from those co-manufacturers. So that's how it started. And then from those interactions we've had directly, they got really excited about different other opportunities within their larger business portfolio, introduced technology to other, call it, leaders under certain brands and product areas. And then communicated a desire to continue testing at their location, which led to the TELOA and future deployment of 10-kilowatt.

That's great. And this came through your own sort of sales efforts over time into them or to come through partners like any of these sort of co-manufacturers that you've done work with in the past?

This particular project came through our own efforts. So through cold reach out to certain leaders within this organization that led to initial conversations, which led to testing and then they're on. And also meeting with them face-to-face at specific trade shows where we were both going to be attending and building that relationship, which has led to this point.

And then in terms of just kind of how the business is going otherwise. So can you talk a little bit more about sort of like your pipeline, your activity on the large-scale system front, you mentioned some areas of focus, the fruit snacks, the dairy, the pet treats. Are you seeing that any of the timelines that you said that were kind of extended out a little bit or maybe having slower decisions? Are you seeing some progress there?

Yes. Many of these discussions are still very active, and it's more so aligning with their project time lines to have facility readiness and projected commercialization of new products. So we had anticipated a few large-scale deals hopefully landing in Q1 and Q2 of this year, unfortunately, didn't go through because for four specific cases, we had a case of two of them where the launch of their product using 10 kilowatts was delayed into market. Their distribution just didn't line up with having been able to make a decision earlier, but there's still definitely opportunities for later on. And then we also have some current discussions right now that may be extended maybe 1 or 2 months from Q2 to Q3, which are still very active this quarter. So in regards to the number of opportunities in the pipeline, I wouldn't say that it's decreased materially by any means. It's more so specific delays to individual projects, and we have to deal with that. I mean that's typically been the case with our business. And you never know, we can have a quarter in the future where we signed two or three deals. And there's quarters, obviously, we've had in Q1 and Q2 where there's no deals. That's just the way that our business works. There's no predictable seasonality to it. We are beholden to the decision points that make the most sense for our future royalty partners.

[Operator Instructions] We have reached the end of the question-and-answer session. I will now turn the call over to Brent Charleton, CEO, for closing remarks.

Additionally, if there are any further questions that you'd like to pose after this call, both Dylan and I are readily available to communicate an answer. So please don't be afraid to reach out. But I do want to thank everyone who did join the call today, being it was a tougher quarter. We hope that future quarters are improved. And at this time, you may now disconnect.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.